Tuesday, 24 April 2018

Bonjour, Madame, je m’appelle “Monsieur le President”

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SwissInvest strategist Anthony Peters takes a gloomy look into the future of the Frangela axis

Anthony Peters, SwissInvest Strategist

“I LOOKED THE man in the eye. I was able to get a sense of his soul.” That was what George W Bush had to say about Vladimir Putin when they met for the first time in Ljubljana in 2001. He went on to praise the Russian president as straightforward and trustworthy.

Politics has thrown up some odd bedfellows over the years, not least of all Joe Stalin and Winston Churchill, and now we wonder whether, after their meeting in Berlin last week, Mutti Merkel and Francois Hollande are to be counted among them.

They did not look overly comfortable in their “meet the press” appearance, and Hollande’s assurances that he had told the Chancellor of his ideas for economic stimulus were not met with any comment on her part that might have indicated that she was listening.

The one thing that is certain is that she will not have readily agreed with him. Let’s face it, all the nonsense about mixing austerity with stimulus is equivalent to saying “I promise to pay off the Amex – but if it’s all right with you, I’ll use the Visa to do it”. The Germans seem to be the only people who have got their head around the concept that austerity means less spending, and not more.

There are certain catchphrases which I really find hard to deal with – the “risk on/risk off” nonsense has me apoplectic, and if I run into another person “kicking a can down the road” I’ll kick him down the road.

MY LATEST BUGBEAR is “austerity isn’t working” – tell me please, what the hell does that mean? Do they think that austerity is a kind of antibiotic, where you get given a bag of tablets and the fiscal infection subsides overnight?

Austerity is the result of the acknowledgement that you – “you” being a country, in this particular case – are spending more than you are making. This is not a binomial equation. It’s the most simple thing in the world; money in < money out = bad; money in = money out = OK; money in > money out = good.

If dealing with cyclical effects, deficit spending in order to smooth the amplitudes is fine and dandy, but when you hit the sort of deep-seated structural problems that the West is facing, there is only one way forward and that is, as they say in England, to cut your suit to match your cloth.

Politics has thrown up some odd bedfellows over the years, not least of all Joe Stalin and Winston Churchill

The speed at which expenditure has to be adjusted is not a decision that the borrowers alone can take. It is, much to the surprise of many people – not least politicians – mainly in the gift of lenders. With Italian 10-year yields back at 6% and the Spanish/German yield spread at 500bp, lenders are voting with the “sell” button. France is also widening to Germany again and is printing north of 150bp.

FOLLOW THIS THOUGHT: in the UK, government expenditure makes up around 45% of GDP. If we briefly move away from the rather meaningless measure of deficit/GDP and think in terms of deficit/fiscal revenues, we find that something in the region of one in three pounds spent by government is borrowed. So, although we are reporting a deficit-to-GDP ratio of somewhere in the low teens, we discover that in order to balance the books, government has to eradicate close to a third of its excess expenditure.

The time is drawing near when we will have to acknowledge that, under austerity, some people “losing out” (as the press love to put it) is not sufficient and we will have to grow accustomed to the simple and unavoidable reality that those who don’t “lose out” will become the lucky minority.

As hiring unemployed Greek government statisticians is no longer an option, I suppose there is a “shrink-to-fit” process ahead of us which, painful though it will be, appears to be without a meaningful alternative.

The broad failure of the eurozone authorities on their begging trips to Asia in general, and to China in particular, is a case in point. If the Chinese could be convinced that spending is coming under control and that, at worst, the situation has been stabilised, I’m pretty sure they would have ponied up the odd few hundred billion.

But at the moment all they can see is a bottomless pit in which the penniless are guaranteeing the debts of the bankrupt and in which everyone relies on the Germans to provide all of its own life-jackets to others, free of charge.

I MUST OF course state that I fully agree that austerity does not generate growth. However, in the same vein I also agree that beef doesn’t grow on trees and that you can’t play football on a snooker table (unless very drunk, of course).

So the conclusion is that either government expenditure has to fall by said third, that fiscal revenue has to be raised by a similar amount, or we have to face a mix of both.

However, as the providers of revenue are obliged to compete in a global market and against economies that have not created expense straitjackets they can’t afford, simply raising taxation is not an option, for it slaughters any residual competitiveness – as President Hollande is undoubtedly about to find out. Hence, the expense side has to be addressed, and as miserable as it will be, the route there is a one-way highway with exit slip-roads along the way.

I’m not sure that this is going to prove to be a particularly easy platform for the jolly “Merkollande” or “Frangela” axis.

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